For the Southeast/Gulf regions, Bentek Energy LLC projects that gas production could increase by 11.3 billion cubic feet a day between January 2008 and December 2012.

An extraordinary surge of gas-infrastructure investments now under way in the Southeast/Gulf region, combined with the rapid growth of production from tight sands, shales and other unconventional resources, is propelling the gas industry into a new era.


More than 75 pipeline, storage and liquefied natural gas (LNG) terminal projects in and around the Southeast/Gulf region have been announced or are planned for completion between 2008 and 2012. These projects will shift gas-flow patterns, disrupt regional pricing relationships and realign the value of firm transportation capacity.


Astronomical flows of gas that will soon be coming from new shale plays will add to the changing situation.


A series of recent market analysis reports issued by Bentek Energy LLC, of Evergreen, Colorado, illuminate the landscape. The company defines the Southeast/Gulf region as a 650-mile area extending from the Bossier sands of East Texas and the Barnett shale (Fort Worth Basin) in Texas, eastward through northern Louisiana and on to Transcontinental Gas Pipe Line Co.’s Compressor Station 85 in Choctaw County, Alabama, extending down to the Florida Panhandle.


A combination of factors could result in pipeline capacity constraints out of the Southeast/Gulf by the winter of 2009-10. Should this market scenario play out as predicted in little more than 18 months, there will not be enough pipeline capacity to move both increasing domestic production and gas withdrawn from storage out of the Southeast/Gulf region.


Furthermore, this scenario assumes negligible LNG imports into the region, so any significant LNG imports will simply aggravate the problem.


The primary driver behind this constrained-capacity scenario is the huge growth in gas volumes coming from major unconventional plays, including the Barnett shale and Deep Bossier sands in Texas, the Woodford shale in Oklahoma and the Fayetteville shale in Arkansas. Production from these basins, plus other areas in Oklahoma, Texas and Arkansas, is projected to exceed market expectations, increasing by an astronomical daily 9.4 billion cubic feet (Bcf) by year-end 2012. (This figure does not include output from the newest shale play—the Haynesville, located in northwestern Louisiana.)


Most of this existing and forecasted production is expected to move on a number of new pipelines and expansions of existing pipelines east into the Southeast/Gulf region. The emerging Haynesville shale play in northwest Louisiana is at ground zero of the capacity-constrained area. If public announcements are to be believed, the Haynesville could add another 4 Bcf of daily output by 2012.


As indicated by the accompanying production-growth chart, Bentek projects that daily wet gas production from the Barnett, Bossier, Woodford, Fayetteville and other East Texas production areas could increase by approximately 11.3 Bcf between January 2008 and December 2012.


This is the equivalent of 9.4 Bcf a day of dry gas production (post-processing) that will need pipeline capacity out of the region.


During the next five years, increases in regional gas demand will absorb some of the increased production flowing into the Southeast/Gulf, but not enough to avoid a build-up of excess supply in the region. Across a region stretching from Texas to Virginia, new gas-fired power-generation facilities, industrial load and even some residential and commercial load increases, will contribute to an annual 1.5% growth in daily demand growth of 0.3 Bcf, each year.


However, this demand growth is far less than the 6.9% average annual supply growth projected for the Southeast/Gulf region. Thus, at a macro-level, the overall impact of increased demand will have only a moderate effect on the supply/demand balance looking out to 2012.

Downstream bottlenecks
There are a number of new pipeline projects designed to move much of the growth in production eastward to Mississippi, Alabama and Florida, connecting to large pipelines that move gas to major demand regions.


Gulf South’s Southeast Expansion went into service in late May 2008, moving more than 260 million cubic feet per day to Gulfstream Pipeline and Florida Gas Transmission (FGT) via leased capacity on Destin Pipeline, and more than 300 million a day (with daily capacity of 1.3 Bcf) to Williams/Transco at Station 85 in Choctaw County, Alabama.


Later this year, the Spectra/Centerpoint Southeast Supply Header is expected to bring up to 1 Bcf a day of gas from Perryville, Louisiana, to Gulfstream Pipeline near Mobile, Alabama.


In early 2009, Boardwalk’s Gulf Crossing Pipeline will add another 1.7 Bcf a day of delivery capacity to Transco Station 85. And, by mid-year 2009, the Kinder Morgan- Energy Transfer Partners project, called Midcontinent Express, will add still another 1.4 Bcf of daily delivery capacity to Station 85. Many other smaller projects also will increase flows west-to-east across the Southeast/Gulf region.

Constrained pipeline capacity downstream of new projects will limit effectiveness of the system and create bottlenecks and gas-on-gas competition.

Unfortunately, constrained capacity downstream of the new pipeline projects will limit the overall market benefit of these new projects, for which the midstream industry is spending millions of dollars.


Consider the situation at Station 85 in Alabama. During the winter, this point usually runs at 100% capacity. Although there is capacity at Station 85 available during the summer, further downstream at Transco’s Station 180 near Unionville, Virginia, capacity utilization is at 100% year-round. This constraint effectively limits incremental flows into Station 85 to new demand in the Alabama-to-Virginia region.


While demand growth is expected in Transco’s service territory south of Station 180, it will be far less than the growth in new supplies moving into the region. The implication is that any new supplies moving into Transco Station 85 will displace supplies that have traditionally moved into that market.

Florida market
A similar situation exists in the Florida market, where gas moves into the state via either FGT or Gulfstream. Both of these pipelines deliver gas primarily to electric-power utilities and flow at or near maximum capacity during the hottest months of the summer. Neither pipeline has access to market-area storage.


This situation means no more gas can get to Florida on peak summer days when it is needed. Consequently, additional supply moving into FGT and Gulfstream from the new Southeast Supply Header and other incremental pipeline-capacity expansions must be absorbed by new demand in the Florida market during non-peak demand periods, or, replace supplies moving into that market from traditional Florida pipelines. Thus, new supplies moving into the region will displace traditional supplies into this market in the same manner described above on Transco.


A number of projects are expected to be in service in a few years that will relieve some of the downstream-capacity constraints out of the region. For example, FGT’s Phase VIII expansion is expected to begin service during the spring of 2011. Until this and other downstream pipeline expansions go into service, the market can be expected to experience significant gas-on-gas competition on the eastern side of the Southeast/Gulf region.

Hitting the wall
One of the most important consequences of projected production growth and modest demand growth is that pipeline capacity out of the Southeast/Gulf region will fill in fewer than two years. Total winter pipeline capacity out of the Southeast/Gulf has been essentially flat at 22.6 Bcf a day, but net surplus (unused) daily capacity dropped from 7.5 Bcf during the winter of 2005-06 to 4.7 Bcf in 2007-08.


During the past few years, with only negligible increases in inbound capacity, surplus outbound capacity has dropped 37%. Almost all of the outbound flow increase is associated with production growth in the Texas/Midcontinent region moving into the Southeast/Gulf region.
Bentek estimates that the demand for capacity out of the Southeast/Gulf will exceed 100% of the available pipeline capacity on all pipelines exiting the region during winter 2009-10. In effect, there will not be enough capacity to move both growing production and storage withdrawals out of the Southeast/Gulf, exacerbating the regional supply build-up.


New pipeline capacity out of the Southeast/Gulf region is currently understood to be limited to only three announced projects: the FGT Phase VIII expansion mentioned earlier, Sonat’s South System III expansion (in 2010), and an expansion on Transco’s main line from Station 85 to Virginia (in 2011), for a total daily capacity addition of 1.4 Bcf from all three projects.


While providing some relief, even these expansions will not be enough to handle the projected 2.5 Bcf of increased daily supply over available outbound capacity.


Bentek’s analysis is based on the following premises:


• All of the production growth from the Barnett shale, Bossier sands, Woodford and Fayetteville shales, and adjacent areas in the Texas/Midcontinent region, will move into the Southeast/Gulf region.
• New pipeline capacity out of the Southeast/Gulf region is limited to the three projects referenced earlier.
• Southeast/Gulf seasonal storage injections/withdrawals will continue in about the same pattern and magnitude as in the last few years.
• LNG imports into Gulf terminals are assumed to be minimal.
• State and federal offshore Louisiana production is assumed to be flat with current levels for the foreseeable future.
• The consequences of increases in demand will be insignificant.


Based on this projection, capacity utilization out of the Southeast/Gulf will reach 100% during winter 2009-10. In effect, there will not be enough capacity to accommodate the growth in production volumes and the increased storage withdrawals to move out of the Southeast/Gulf region. Capacity utilization is at 100% during the summer of 2010 even with normal storage injections and by 2010, the demand for outbound capacity is projected to be 2.5 Bcf a day greater than available capacity.
New pipeline expansions reduce that gap in 2011 and 2012—but not enough to eliminate the problem.

Regional price
There are several important implications of this emerging capacity-constrained Southeast/ Gulf regional market scenario.


• Prices within the region will decline, relative to the rest of the market. Since the price-basis reference point at Henry Hub, Louisiana, is within the region, this implies that basis relative to most points outside the region can be expected to widen.
• The value of seasonal storage within the Southeast/Gulf region can be expected to decline. Any gas that moves into storage must compete with growing domestic production to move out of the Southeast/Gulf region on limited pipeline capacity.
• Minimal LNG imports are assumed in this analysis. Any significant increase in LNG imports will simply aggravate the problem.
• Surplus gas supplies must go somewhere, and there are several likely scenarios for gas-flow displacement. Gas traditionally moving into the Southeast/Gulf region from the Midcontinent and West Texas will most likely be displaced into lower-value markets in the Western U.S. and the difference between Southeast/Gulf prices and traditionally lower-value Western markets will narrow.
• Pipeline corridors to the Midwest and Ohio Valley filled with Southeast/Gulf supplies will likely displace Canadian gas imports. This scenario will likely aggravate the gas-on-gas competition between Southeast/Gulf region producers and Rockies producers as well.


The unmistakable conclusion is that additional outbound pipeline capacity, and more debottlenecking projects than those currently planned, are needed—and sooner rather than later.
To have any real effect, that capacity must move gas supplies beyond any downstream constraints to markets where growing gas demand can absorb the incremental supply.

E. Russell (Rusty) Braziel is managing director for Bentek Energy LLC, a market analysis company for gas and power, based in Evergreen, Colorado. He can be reached at 888-251-1264.

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